There is a strong correlation between fund stewardship and performance, Morningstar found in its 2011 Mutual Fund Stewardship Grade research study, which examined more than 1,000 funds from 40 fund complexes.
Morningstar found that those funds with high Stewardship Grades (those receiving an A or a B) are more likely to provide competitive risk-adjusted returns and survive in the long term.
Ninety-nine percent of funds that Morningstar graded with an A in 2004 and 2007 survived, and 80% of funds that received either an A or a B In 2007 had competitive risk-adjusted returns relative to their peers.
Further, 75% of fund managers who have their own fund invested in the fund got an A in 2007, and 33% of funds that got an F In 2004 did not survive. In addition, funds with low fees had the best risk-adjusted returns.
Among the 1,051 funds Morningstar evaluated, the majority, 455, got a C. Ninety got an A, 359 a B, 145 a D and two an F.
Morningstar also calculated an average for the fund families. Six fund families got an A: American Funds, Clipper, Davis, Diamond Hill, Dodge and Cox and Primecap.
“The results of this study show a very strong correlation between good stewardship of capital and a positive investor experience,” said Laura Pavlenko Lutton, editorial director of fund research and one of the authors of the study. “Investors can use the Morningstar Stewardship Grade as a leading indicator of whether a fund will take good care of their money and put fund shareholders’ interests first.”
Lutton added: “While we would never suggest that a fund’s Stewardship Grade should be the sole basis for making an investment decision, it can certainly help investors filter their choices. Funds with top Stewardship Grades are most likely to employ industry best practices and treat fund shareholders like owner, as opposed to treating them just like another dollar through the door.”
Morningstar first launched the Stewardship Grades in 2004. They are comprised of five major criteria: the corporate culture of the fund’s parent organization, the quality of the board of directors, the fund managers’ financial incentives, the fund’s fees and the fund’s regulatory history.